Monday, July 31, 2006

What should the Fed do? I think the Fed should pause at its meeting next week,
let past tightening catch up, and reassess the situation at September's meeting.
That will reduce the chances of overshooting.

The question "What will the Fed do?" is harder to answer. David Altig at
macroblog looks at the chances the Fed will raise rates at its next two FOMC
meetings:

Futures markets appear to have no clear conviction on the outcome of the next
FOMC meeting. The message is that market participants are looking for one more
rate hike, either in August or September. Moreover, they doubt the Fed’s
position that “pause does not mean done.”

Friday's second quarter GDP report really wasn't all that bad, but
apparently
not as good as expected was enough. And Professor Duy was right -- the
market does seem to doubt the Fed’s position that “pause does not mean done.”

It's still a relatively long time to September, but at this point
it is hard to see what might significantly shift sentiment about this week's
meeting.

Federal Reserve Bank of St. Louis President William Poole said he's
undecided on whether the central bank should raise interest rates at its next
meeting in eight days.

Poole, speaking to reporters after a speech in Louisville, Kentucky, said
he's "50-50'' on the decision, which needs "all our analytical skills.'' Recent
data show slowing economic growth, while inflation has "tilted'' upward, he
said. Containing inflation is the Fed's "primary'' goal, he added.

SF Fed's Yellen did note rule out more rate hikes
though she said that the Fed funds rate is "in the vicinity" of the right level,
noting the Fed remains responsive to the data and she expects below-trend growth
later in 2006 to pull down inflation. Yellen also confirmed that the Fed was
mindful of policy lags and even though core inflation is above her comfort zone,
the Fed can pause before it begins to decline, while retaining a more
restrictive policy setting... Overall the comments are fairly balanced and do
not rule in or out another hike in August

Bloomberg also reports, with a somewhat dovish reading of the statements:

San Francisco Fed President Janet Yellen said ... "It appears to me that the
federal funds rate currently lies in a vicinity that is roughly appropriate for
the Fed to attain its key objectives over the medium run,'' ... "If we kept
automatically raising rates until we saw inflation start to respond, we most
likely would have gone too far.''

Yellen's remarks appeared to outline the case for a pause, while emphasizing
that data surprises, especially on inflation, could also alter her outlook.
Answering reporters' questions afterward, Yellen said she wasn't revealing how
she would lean at the FOMC session.

"I don't think it's the case that I have favored a pause or attempted to
indicate what my inclinations would be,'' Yellen told reporters. "I've attempted
to give a balanced presentation that would say, essentially, we are at a
delicate point for policy. We're, say, close to the end of the road.'' ...

Yellen said inflation rates are "disappointing'' and "somewhat above my
comfort zone.'' She added that there are "upside risks'' to her inflation
forecast. "The extent and timing of any additional firming should depend on how
emerging developments affect the economic outlook,'' ...

As the
WSJ notes, and David Altig notes above as well, there are several key
reports yet to come before the meeting, and these could affect the economic
outlook:

Several reports due out later this week could have a big impact on whether
the Fed decides to raise the target for the federal-funds rate by a
quarter-point for the 18th time to 5.5%. Tuesday, the Labor Department will
release data on personal income and spending, a report that contains closely
watched inflation metrics. Also Tuesday, the Institute for Supply Management
will release its July manufacturing index. On Friday, the government will issue
the nonfarm payroll report for July.

A few weeks ago I noted that the fed funds futures contracts seemed to reflect an expectation that we'd see one more rate hike this fall, and that would be it. But a lo... [Read More]

Tracked on Monday, July 31, 2006 at 03:19 PM

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What Should the Fed Do? What Will the Fed Do?

What should the Fed do? I think the Fed should pause at its meeting next week,
let past tightening catch up, and reassess the situation at September's meeting.
That will reduce the chances of overshooting.

The question "What will the Fed do?" is harder to answer. David Altig at
macroblog looks at the chances the Fed will raise rates at its next two FOMC
meetings:

Futures markets appear to have no clear conviction on the outcome of the next
FOMC meeting. The message is that market participants are looking for one more
rate hike, either in August or September. Moreover, they doubt the Fed’s
position that “pause does not mean done.”